Case 2 1 2 3 4 5 Case 3 6 7 8 9 10 Case 4 11 12 13 14 15 Case 5 16 17 18 19 20 Case 6 21 22 23 24 25 Case 7 26 27 28 29 30 Case 8 31 32 33 34 35
6 (a) TREATMENT OF GOODWILL
Goodwill is the result of the efforts made by the existing
partners in the past. In partnership goodwill or premium is the compensation
paid to old partners who sacrifice their profit sharing right in favour of incoming
partner. From the accounting point of view, there may be different situations
related to the treatment of goodwill, which is discussed below:
1. Goodwill paid privately: If
goodwill is paid privately by the new partner to the sacrificing partners no
entry is made in the books of the firm.
2. Goodwill brought in cash by new partner
and the same retained in the business: In
this case the goodwill amount is credited to sacrificing partners’ capital a/c /
current a/c in their sacrificing ratio. The following are the journal entries: a. For bringing goodwill: Cash/Bank
a/c…………………….....................………Dr XXXX To Goodwill a/c XXXX
b. For transferring goodwill to old partners capital a/c Goodwill
a/c……………………….........................……Dr XXXX To Sacrificing Partners Capital/ current
a/c XXXX
Instead
of giving the above two entries, we can pass only one entry to get the same
effect: Cash/ Bank a/c…………........................................…Dr xxx To
Sacrificing Partners Capital/ current a/c xxxx
3. Goodwill brought in kind: A
new partner instead of bringing in cash may bring his share of goodwill and
capital in the form of assets. In such situation amount of assets brought in
will be debited and credited in two accounts like goodwill a/c and new partner’s
capital a/c. Afterwards goodwill amount should be transferred to the sacrificing
partners capital a/c by using sacrificing ratio.
a. For bringing goodwill: Assets…………………….....................……...............Dr XXXX To New partner's Capital a/c XXXX To Goodwill
a/c XXXX
b. For transferring goodwill to old partners capital a/c Goodwill
a/c……………………….........................…Dr XXXX To Sacrificing Partners Capital/ current
a/c XXXX
4. Goodwill brought in cash by new partner
and the same withdrawn by the old partners fully or partely: If
the agreement so permits, the sacrificing partners may decide to withdraw the
goodwill brought by the new partner either fully or partly. In such a situation
following are the Journal entries:
a. For bringing goodwill: Cash/Bank
a/c…………………….....................………Dr XXXX To Goodwill a/c XXXX
b. For transferring goodwill to old partners capital a/c Goodwill
a/c……………………….........................……Dr XXXX To Sacrificing Partners Capital/ current
a/c XXXX
c. For transferring goodwill to old partners capital a/c Sacrificing Partners Capital/ current
a/c...........……Dr XXXX To Cash/Bank
a/c XXXX
5. When the new partner is not able to bring his share of goodwill in cash: In such case take the amount of goodwill from new partner's capital a/c and distribute among the sacrificing partners in their sacrificing ratio. Following will be the Journal entry: For taking goodwill from the capital new partner: New Partner's Capital
a/c…………………….............Dr XXXX ( For his share of goodwill) To Sacrificing Partners Capital/ current
a/c XXXX ( Sacrificing Ratio)
6. When only a portion of the goodwill is brought in cash by new partner: In this case take the portion of goodwill which is not bring in cash from the new partner's capital a/c and distribute among the sacrificing partners in their sacrificing ratio.
7. Goodwill appearing in the books at the time of admission: If goodwill appears in the balance sheet of a firm before the admission of a new partner, it should be debited to the old partners' capital a/c in their old capital sharing ratio for closing the goodwill a/c. Following will be Journal Entry: Old Partners Capital/ current
a/c...........…............…Dr XXXX To Goodwill
a/c XXXX
8. Hidden Goodwill : Sometimes the value of the goodwill is not mentioned in the question. In such situation goodwill is calculated with reference to the total capital of the firm and profit sharing ratio.Following example makes clear it:
Balu and Lalu are partners sharing P&L in the ratio of 3:2 with capitals of Rs.80,000 and Rs.50,000 respectively. They admitted Malu as a partner for 1/5th share in the future profits. Malu brings in Rs.60,000 as his capital. Calculate the goodwill of the firm and Malu's share of goodwill.
Solution:
s In this case new partner Malu brings Rs. 60,000 as capital for 1/5th share in future profits. s This means the total capital of the firm is Rs. 3,00,000(60,000 X 5/1). s Capital contributed by all partners including new partner is Rs.1,90,000( 80,000 + 50,000 + 60,000) s The difference of total capital of the firm and all partners' contribution including new partner is the value of goodwill of the firm. That is Rs.1,10,000(3,00,000 - 1,90,000) s Malu's share of goodwill is Rs. 22,000(1,10,000 X 1/5)
